Brian’s Briefs | Brian Weide

As I mentioned yesterday, bonds and Mortgage-backed Securities have been flip-flopping around like water on a hot skillet the last 10 days or so, and today was no exception. While closing off their lows, both securities closed lower today after having rallied yesterday. Data was mildly bond-friendly overall. Personal Income rose by .2%, which was twice the rate expected (see Moving the Market). Personal Spending was unchanged for May against expectations of +.1%. Core PCE Prices, which is a favorite gauge of the Fed in measuring inflation, as it works with consumer’s actual spending habits instead of a fixed “basket of goods” as does the CPI, was up by .1% vs. consensus estimates of .2%.

The Chicago Purchasing Managers’ Index landed at 52.9 for June- real close to estimates of 53.0 but not quite there. Finally, the final read for June for the University of Michigan Consumer Sentiment survey reported at 73.2; again, below estimates of 74.1. So with the exception of Personal Income, all the stats were below estimates, but yet very close; hence my insinuation that bonds were mildly supported by these numbers. However, data was not the main driver for bonds today. First off, stocks were strongly into rally mode (Dow +277.83 at 12880.09, Nasdaq +85.56 at 2935.05, S&P +33.12 at 1362.16), being buoyed by news that Eurozone officials have opened the door for Spain’s banks to be directly recapitalized with bailout funds once Europe sets up a single banking supervisor. Moreover, Spain will not have to take on additional sovereign debt.

This potentially puts Spain on a much stronger footing, and negates much of the fear in both the European and US markets that a meaningful slowdown could occur on both sides of the Atlantic. This view on Spanish debt came from yesterday’s Euro Summit. What emerged from the meeting was a concession by Germany to allow EuroZone member states to access funds from the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) to help recapitalize their Banks as long as they meet budgetary rules outlined by the European Commission. Also a victory for the periphery states was that no additional austerity measures and or strict oversight from the Troika – European Commission, European Central Bank and International Monetary Fund would be implemented on these newly borrowed funds. But there are still tremendous hurdles to overcome in Europe, and that’s why many feel that bonds will come back, and soon, from their somewhat weak positions. Indeed, bonds were well of their lows by the close today. Perhaps because of relative optimism in Europe, oil gushed higher by $7.27 to $84.96 a barrel today. Monday will start off the holiday-shortened week with the ISM Index and Construction Spending. Have a great weekend! bw

Moving the Market

Date

Release

For

Actual

Consensus

Prior

Revised From

Jun 29

Personal Income

May

0.2%

0.1%

0.2%

Jun 29

Personal Spending

May

0.0%

0.1%

0.1%

0.3%

Jun 29

PCE Prices – Core

May

0.1%

0.2%

0.1%

Jun 29

Chicago PMI

Jun

52.9

53.0

52.7

Jun 29

Michigan Sentiment – Final

Jun

73.2

74.1

74.1

U.S. Treasuries

COUPON

MATURITY

PRICE/YIELD

PRICE/YIELD CHANGE

TIME

3-Month

0.000

09/27/2012

0.08 / 0.08

0.000 / 0.000

16:59

6-Month

0.000

12/27/2012

0.15 / 0.15

0.000 / 0.000

16:59

12-Month

0.000

06/27/2013

0.20 / 0.20

0.000 / 0.000

16:59

2-Year

0.250

06/30/2014

99-28+ / 0.30

0-00 / 0.000

16:59

3-Year

0.375

06/15/2015

99-30+ / 0.39

0-00+ / -0.003

16:59

5-Year

0.750

06/30/2017

100-04+ / 0.72

-0-04¾ / 0.030

16:59

7-Year

1.000

06/30/2019

99-09½ / 1.10

-0-12+ / 0.058

16:59

10-Year

1.750

05/15/2022

100-30+ / 1.64

-0-20 / 0.068

17:00

30-Year

3.000

05/15/2042

105-00 / 2.75

-1-20+ / 0.078

16:59

Mortgage-backed Securities: -16/100 at the close

Treasuries Slide on EU Plan for Loans to Spanish Banks

Treasuries fell, pushing up 10-year yields the most in almost three months, after euro-area leaders expanded steps to stem the bloc’s debt crisis, damping demand for the safest assets.

Thirty-year bond yields increased the most in more than two weeks as European Union officials meeting in Brussels relaxed terms on loans to Spanish banks and eased conditions of possible help for Italy. Treasuries have still returned 3.4 percent this quarter, according to Bank of America Merrill Lynch indexes, as investors sought a haven from Europe’s financial turmoil.

“The feel-good trade is on and Treasuries sold off some, as there is some optimism out of Europe as policy makers are starting to get their act together,” said Sean Murphy, a trader in New York at Societe Generale SA, one of the 21 primary dealers that trade with the Federal Reserve. “Still, there is a wait-and-see attitude given the concerns, as we are not out of the woods.”

The 10-year yield climbed as much as 10 basis points, the biggest intraday increase since April 3. It fell three basis points on the week and rose nine basis points on the month. The yield touched a record low 1.44 percent on June 1.

The 30-yeat yield climbed as much as 10 basis points today, the most since June 11.

Less Expensive

A valuation measure showed 10-year notes were trading at a less expensive level. The term premium, a model created by economists at the Fed, was at negative 0.86 percent, compared with negative 0.89 percent yesterday. It reached the costliest ever, negative 0.94 percent, on June 1 as investors sought refuge from Europe’s debt turmoil.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.

Europe’s leaders also discussed ways to reduce the risk premiums on Italian and Spanish bonds, which have stoked concern among investors and global policy makers that the region’s currency union threatened to break apart. Officials left open the timing and conditions of any support, raising the risk that bickering over the fine print will — as after prior summits — nullify the initial boost to confidence.

“People had pretty low expectations of the summit and are a little bit more optimistic now,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, a primary dealer. “The devil is in the details on most of this stuff.”

Treasuries remained lower even after data showed personal spending in the U.S. stagnated in May and consumer confidence dropped this month.

The Thomson Reuters/University of Michigan final index of sentiment fell to 73.2, from 79.3 at the end of May.

Consumer Spending

Consumer spending stalled as slower job gains and a lack of wage growth prompted Americans to cut back. Purchases were unchanged, the weakest since November, after a 0.1 percent rise the prior month that was smaller than initially reported, Commerce Department figures showed today in Washington.

A measure of prices tied to consumer spending advanced 1.5 percent in May from the same month a year earlier, the smallest gain since January 2011 and below the Fed’s long-run goal of 2 percent. The price gauge, excluding food and energy costs, increased 1.8 percent.

Fed officials last week extended their effort to support the U.S. economy by replacing shorter maturities in their holdings with longer-term debt. The program, which will now swap $667 billion through year-end, is known as Operation Twist. While policy makers refrained from introducing a third round of large-scale debt purchases under quantitative easing, Chairman Ben S. Bernanke indicated it remains an option.

The Fed bought $4.67 billion of Treasuries today due from June 2018 to May 2020 as part of the program.

Quantitative Easing

“It’s very important to focus on the personal consumption and expenditure,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The Fed has made clear it’s worried that consumer spending is slowing. We’re still having the debate about what’s going to push the Fed into doing more quantitative easing.”

The Treasury drew weaker-than-average demand this week at each of three note auctions totaling $99 billion.

Seven-year securities yielded a record low 1.075 percent in a sale yesterday. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.64, the lowest since October.

The bid-to-cover ratio at a $35 billion sale of five-year debt on June 27 that drew a yield of 0.752 percent was 2.61, versus an average of 2.97 at the past 10 offerings. An auction of the same amount of two-year securities the previous day had a ratio of 3.62, versus 3.95 at the May offering and an average 3.71 at the past 10. The sale drew a 0.313 percent yield.

Yield Levels

“What this does tell you is that people don’t like the levels,” said Jersey of Credit Suisse. “It’s hard to like these yields unless you think there’s going to be a significant deflationary impulse. It’s hard to imagine a significant rally if Europe continues to muddle through and the U.S. economy seems to be stabilizing at lower levels.”

Pacific Investment Management Co.’s Bill Gross said a “debt trap” remains in place even after European leaders reached an agreement that alleviated concern the region’s banks will fail.

Pimco continues to avoid the debt of nations including Spain and Portugal in favor of U.S. Treasuries and mortgage securities, Gross, who runs the world’s biggest bond fund, said in a radio interview today.

“The peripherals and even the core union nations have too much debt,” Gross said. “The marginal cost of that debt is far above nominal GDP growth in respective nations. That continues a debt trap unless the cost of debt can come down.”